Lloyds shares fall on capital questions

Bloomberg

Lloyds Banking Group Plc, Britain’s largest mortgage lender, posted a 15 percent decline in third-quarter profit as it took a 1 billion-pound ($1.2 billion) charge to compensate customers who were wrongly sold loan insurance.
The bank’s shares fell as much as 3.8 percent as impairments climbed more than most estimates while an accounting change drove an improvement in capital. Excluding the charge and other one-time items, profit fell 3 percent to 1.91 billion pounds, the London-based bank said in a statement Wednesday, missing the 2.04 billion-pound average of six estimates compiled by Bloomberg News.
Chief Executive Officer Antonio Horta-Osorio, 52, remains tangled in Britain’s costliest banking scandal as he attempts to navigate record-low interest rates and a potential economic slowdown sparked by the country’s vote to leave the European Union. His bank has now taken more than 17 billion pounds in charges for payment protection insurance over the past five years, more than any other major British lender.
“This would be the last big PPI provision we would expect to take,” Chief Financial Officer George Culmer said on a call with reporters. “Even after this provision, the group continues to be strongly capital generative.”

Share Decline
The shares dropped 3.1 percent to 53.62 pence at 9:05 a.m. in London. Lloyds has fallen 26 percent this year for the second-worst performance among Britain’s largest banks, behind Royal Bank of Scotland Group Plc. The British government resumed selling its 9.1 percent stake in Lloyds earlier this month, abandoning a previous plan to hold an offering for individual investors.
The firm’s core Tier 1 capital ratio rose to 13.4 percent from 13 percent at the end of June, driven by a gain tied to switching the way it classifies U.K. sovereign bonds on its balance sheet. The figure is closely watched because Horta-Osorio has pledged to return excess cash above 13 percent to shareholders.
The lender said it reclassified 20 billion-pounds of gilts to available for sale from their previous status of held to maturity, which added 80 basis points to the ratio. That helped offset a 20 basis-point hit from its pension fund swinging to a 740 million-pound deficit in the period. While some analysts said the capital improvement was better than they expected, others viewed the accounting change as a one-time boost.

‘Misleading’ Capital
“When a bank resorts to stuff like this, you know they are definitely reaching down the back of the sofa,” said Chirantan Barua, an analyst at Bernstein with an underperform rating on the shares. “The higher capital print is misleading.”
The increase in PPI provisions come after the U.K.’s Financial Conduct Authority pushed back a proposed deadline for consumer complaints by one year to mid-2019, forcing lenders to set aside additional funds for compensation. Britain’s biggest lenders have now taken more than 30 billion pounds in charges between them since the inception of the PPI scandal in 2011.
Lloyds was considering taking on additional liabilities through an acquisition of Bank of America Corp.’s MBNA credit-card business, people familiar with the matter said earlier this month. While acquiring the firm would add 6.7 billion pounds of assets to help bolster the bank’s earnings, MBNA took a 211 million-pound charge for PPI last year and will probably need to set aside more funds in future. Lloyds is attempting to negotiate an indemnity from Bank of America, the people said.
“There’s absolutely no way this group is going to be entertaining increases to PPI liabilities or anything like that,” Culmer said, when asked whether the bank would take on exposure through an acquisition of MBNA.

Higher Impairments
Pretax profit fell to 811 million pounds from 958 million pounds a year earlier. The net interest margin, the difference between income from lending and the cost of funding, fell to 2.69 percent from 2.74 percent in the previous quarter. Impairments climbed 30 percent from a year earlier to 204 million pounds, more than the 184 million pounds analysts estimated. Revenue climbed 1 percent to 4.28 billion pounds.
Operating costs were little changed from a year earlier at 1.92 billion pounds. Horta-Osorio is about three-quarters of the way through his plan to eliminate 12,000 roles by 2017 to reduce operating expenses.
Lloyds is exposed to a potential slowdown in the U.K. economy from the country’s vote to leave the European Union, with about 95 percent of its assets in Britain. Although the bank isn’t seeing any change to consumer habits since the June 23 vote, small business customers have paused their investment plans,
Horta-Osorio said.
The bank has seen “some retraction on the investment and loan side, but nothing that is too significant,” the CEO said on a call with reporters. So far “it’s too early to assess any longer term trends.”